MARKET OBSERVER – N° 134

In the month of April the stock markets were marked by a generalized technical rebound which allowed almost all the international indices to rebound from the marked oversold bias that transpired in the second half of March following the economic fallout of Covid-19.

Quantifying, the Chinese stock exchange and other Asia-Pacific markets are those that have contained the correction of this year to within 10%, followed by the United States which has recovered about half of its loss, while Europe must be content to retrace about a third of its loss and some emerging markets, such as the South American exchanges, are still struggling to recover. There are two elements that explain the different degrees of recovery of the various exchanges, the first linked to the timing of the spread of the virus and the invasiveness of the containment measures implemented by the respective authorities, the second depends on the speed and size of monetary interventions and tax policy implemented.

The analysis of the different dynamics of the stock exchanges provides useful indications for optimizing the process of geographic selection of stock market investment opportunities, in light of the improved technical setup of the same. In fact, an accumulation phase was presumed to follow the rebound from the initial oversold phase, and it materialized in the last three weeks, characterized by a lateral movement of the main indices, within a generally lower oscillation band of 10%. Taking for example the S&P 500 index in the United States, this range was between 2700 and 2900, a level exceeded at the end of last week, which also saw the publication of the worst monthly unemployment rate since The Great Depression; close to 15% for the month of April. During the same week the implicit deflator of the index, the VIX, which measures volatility, fell below 30, after peaking above 80 in mid-March, thus reaching a value compatible with a normalized underlying trend. This dynamic is explained by the fact that the stock market is a discounting mechanism for forecasted economic data, therefore it already takes into account the vertiginous drop in GDP in the second quarter, while it assesses the economic outlook for the second half and 2021 with growing optimism. For example, the return in force of buyers in April on the US stock exchanges, was affected to a large extent by the Fed’s decision to pump $ 4,000 billion into the financial system and by that of the Government to launch fiscal measures for another 2,800 billion, therefore, amounts far above the stimulus for the crisis of 2008. The same argument, subject to quantitative differences, applies to all G20 economies, with an important exception for China.

The latter practically did not utilize monetary stimulus, pumping into the economy only a few hundred billion dollars in February and reducing the cost of money by less than half a percentage point, thus still being able to count on enviable room to maneuver, which the other central banks have almost expended. So, if you share the working hypothesis that the underlying trend of international stock markets is normalizing, the quantification of the downside risk translates, always considering the S&P 500 index as an example, into a modest expansion of the trading range of the index, between 2600 and 3000. On the operational level, a decline towards 2700 should be used to continue gradually accumulating positions both in the sectors that benefit from the altered market trends, such as pharmaceutical, bio-engineering, information technology, logistics, entertainment and food, and in more speculative sectors such as oil, luxury goods and automotive, which perhaps have sold off more than their respective fundamental factors justify.

Nicola Bravetti Data Source: Bloomberg

“This report cannot – nor can – be considered a solicitation to invest in financial instruments”